Defusing the timebomb

Online commentary: Policymakers are now realising that we need not be so scared of an ageing society. The next step is to reverse the wrong-headed policies which the 'demographic timebomb' myth has inspired, argues the Director of the Catalyst thinktank.

The idea that population ageing is creating a "demographic timebomb" that will bankrupt existing systems of social security and public healthcare has become a familiar piece of saloon bar wisdom, and has served as a pretext for cuts in provision for the elderly across the globe.

Fortunately opinion-formers and policymakers are beginning to realise that the "timebomb" thesis is both a mischievous exaggeration and a moral non-sequitur. The urgent task now is to reverse the damage caused by the wrongheaded policies it has inspired.

It is certainly true that in this country, on current figures, it is reasonable to expect a 50 per cent growth in the elderly population over the next 30 to 40 years. But there are two crucial elements missing from this picture before we jump to conclusions about what this means.

The first is that an increase in the numbers of people above a certain age is only one of a number of factors affecting the real "dependency ratio" - the number of people that each working person has to support.

A review of recent history confirms that this is affected much more by changes to the labour market and in general economic conditions than by pure demographic shifts. A major factor lately has been the decline in economic activity of Britain's older industrial areas such as Wales and the North East, with massive under-employment, especially among men over 50, largely hidden behind sickness and disability benefit figures and involuntary "early retirement". And here lies an important clue to our best policy response.

The Catalyst report estimates that it would be possible to fully cancel out the effect of population ageing on the dependency ratio by increasing the employment rate - in short, by creating 2 million new jobs by 2030. Given the extended timeframe this is a perfectly feasible goal, and of course eminently desirable for its own sake - interestingly, the Institute for Public Policy Research recently named the same figure as an appropriate target for the government if it wants to make good its commitment to full employment in a meaningful way.

There are encouraging signs that the government has made the link between pension provision and employment policy, and that this will be a key theme in its imminent Green Paper. The way forward must involve opening up work opportunities to groups for whom activity rates are lower than they might be: especially women, the disabled, the over-50s, and indeed the over-60s. This means removing age discrimination and arbitrary barriers to work, on which the Green Paper can be expected to be forthcoming. But it also means seriously proactive regional policies to stimulate demand for labour where these "reserve armies" are concentrated - here the government has yet to make much progress.

But the second crucial point that needs to be held onto in all these discussions is that even if the real dependency ratio does increase over the coming decades, there is nothing new here. In fact, populations have been ageing at a similar rate for over 100 years without generating the financial and social crises predicted for the twenty-first century. So how have we managed it in the past?

The answer is rising economic productivity. The output of the average worker in today's economy is more than twice what it was fifty years ago, and will be twice again in fifty years' time. This is why even increases in the real dependency ratio give an incomplete picture of what is really going on, because we are not comparing like with like.

The essential follow-on from this point is that, of course, if we are to harness that productivity to help support growing numbers of retired people, we must have in place effective social mechanisms for redistributing a share of the benefits of economic growth to those who in their working lives have helped lay its foundations. This is precisely what the twentieth century welfare state achieved. Rising national and personal wealth meant that state spending could grow on health, social services, pensions and other social benefits, without reversing living standards for those in work.

Of course these institutional arrangements need to be continually revised and developed in response to changing circumstances. But in recent decades worldwide moves of retrenchment in public provision, led by Margaret Thatcher's "implicit privatisation" of the UK pensions system, have actually created a very real looming social catastrophe by dismantling the means by which we have hitherto sustained an ageing population. Pensioner poverty today is a disgrace; on current policies it may soon become an epidemic.

This is why the Catalyst report recommends, in line with what is now a near consensus among experts and academics in the field, the restoration of an earnings-linked basic state pension as the universal foundation for retirement security, and a turn away from the increasing reliance on means-tested benefits (such as the Minimum Income Guarantee now the new Pensioners' Credit) which discourage the take-up of entitlements by today's pensioners and discourage saving by tomorrow's.

It is also why the government needs to be bold in its approach to reforming occupational and personal pension schemes, and keenly attentive to their distributive effects. It is dismaying that the idea of recouping the massive fiscal subsidy to high earners' private pensions seems to have been dropped. Similarly we need to beware a language of "individual responsibility" concealing the extent to which the economic costs of rendering decent occupational schemes more "sustainable" fall disproportionately on the ordinary working people who rely on them.

The fundamental point here is that our system of providing for retirement must be vertically as well as generationally redistributive, because left to its own devices the market economy will continue to concentrate the proceeds of economic progress in the hands of a fortunate few. It is this malignant dynamic that will store up real social and economic trouble for the future unless we take action to counteract its effects.

·: Martin McIvor is Director of Catalyst. "The Challenge of Longer Life? Economic burden or social opportunity" is available from Catalyst at £5 - call 020 7733 2111 or email catalyst@catalystforum.org.uk.

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